Credit Suisse’s debt insurance costs dwarf those of other banks

The cost of buying insurance against the default of Credit Suisse’s debt rose to a record high this week, a sign of growing jitters about the lender’s financial health after the collapse of two U.S. banks sent shockwaves through global markets.

As Credit Suisse’s stock and bond prices rallied in recent days, the price of the bank’s credit default swaps (CDS) — derivatives that act as insurance and pay if the company defaults on its loans — surged. The Swiss bank’s five-year US dollar CDS has now exceeded 1,000 basis points – from less than 400 basis points last time in early March – with similar movements for euro-based contracts.

The rise in the price of default insurance follows a string of failures that have strained Credit Suisse’s equity and debt, culminating in the group turning to the Swiss National Bank on Wednesday to borrow 50 billion francs ($54 billion) and 3 billion Swiss francs in debt. announced a buyback.

A line chart of five-year US dollar CDS prices (basis points) showing that Credit Suisse's CDS prices have risen far above those of other banks.

“With [Credit Suisse], it’s just been one headline after another for most of the last five years,” said John McClain, portfolio manager at Brandywine Global Investment Management. “It’s just one thing after another here.”

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Credit Suisse’s recent CDS moves also follow the failures of US lenders Silicon Valley Bank and Signature. The credit rating agency Moody lowered the outlook for the entire US banking system from “stable” to “negative” on Tuesday due to the “rapid deterioration of the operating environment”.

Other major banks’ CDS prices also rose, but the moves dwarfed the movement in the Credit Suisse contracts. US lender JPMorgan’s five-year dollar CDS rose 15 basis points in the week to Thursday to 94 basis points, according to Bloomberg data. In the case of Citi, the same CDS value increased by 20 basis points to 113 basis points.

Deutsche Bank, a European partner of Credit Suisse that has faced its own strains in recent years, saw its five-year euro CDS rise more strongly, rising more than 70 basis points to above 160 basis points.

“The recent failure of two US banks has made investors much more cautious in the sector and scrutinizing ‘troubled’ banks even more,” Joost Beaumont, head of banking research at ABN Amro, wrote this week, referring to the “CS situation”. as a special case’ and not a sign of ‘broader weakness in the banking sector’.

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Beaumont added that the “special case” argument was reflected in the fact that other banks’ bond spreads rose less than Credit Suisse’s, pointing to the difference in yields between bank bonds and less risky government debt.

Single company name CDSs often trade very thinly, which helps exaggerate market movements. In general, “when a company is stressed, its CDS is exposed to significant stress, but this is amplified by the fact that this is a very, very shallow market”. said the bank credit analyst of a large American asset management company.